Economic System

• Economics - Economics is the social science that analyzes

the production, distribution and consumption of goods
& services.

• Economic System is the system of production, distribution and

consumption

• An economic system is a mechanism (also defined as system or

social institution) which deals with the production, distribution
and consumption of goods and services in a particular society.

• The economic system is composed of people, institutions and

their relationships. It addresses the problems of economics like
the allocation of the resources.
An economic system is the combination of the various agencies, entities
that provide the economic structure that guides the social community.
• Types:

– Capitalism (Market Economy)

– Socialism (Planned economy)

– Mixed (Capitalism + Socialism)

Capitalism
• Capitalism is an economic system in which the means of production
are privately owned and operated for profit, usually in competitive
markets.

• In other words; An economic system in which investment in and

ownership of the means of production, distribution, and exchange
of wealth is made and maintained chiefly by private individuals or
corporations.

OR

• Capitalism is the social system which now exists in most countries

of the world. Under this system, the means for producing and
distributing goods (the land, factories, technology, transport system
etc) are owned by a small minority of people. We refer to this group
of people as the capitalist class. The majority of people must sell
their ability to work in return for a wage or salary (who we refer to
as the working class.)
• ADAM SMITH called “the obvious
and simple system of natural
liberty” (Book: Wealth of Nations).
Subject to certain restrictions, individuals
(alone or with others) are free to decide
where to invest, what to produce or sell,
and what prices to charge. There is no
natural limit to the range of their efforts in
terms of assets, sales, and profits; or the
number of customers, employees, and
investors; or whether they operate in
local, regional, national, or international
markets.
 Capitalist System
(Adam Smith)
•Centralized to Decentralized system

•Authoritarianism to representative
Mercantile System democracy

•Production Factors in •Free flow of resources

Government hands
•People strive for self interest in free
•Export emphasis market

•Beneficial for society

•Based on Demand & Supply Forces

•Monopoly to Competitiveness

•Self sufficiency to International

interdependence

•Producer interest to customer

• Benefits of Capitalism
• In years 1000–1820 world economy
grew six-fold, in years 1820–1998
world economy grew 50-fold
• Provides Choice to customers
• Provides valuable goods and
services
• Capitalism actively rewards positive
traits like hard work
• Similarly, it punishes negative traits
such as laziness and thef
• Narrows the gap between common
person and wealthy
• Provides opportunity to realize dreams
and desires
• Capitalist societies usually do not have
large black markets
• Build on democracy
• Social Good
• Major limitations/ Criticism:
• Downfall of work ethics
• Free Market + Self Interest
• Accumulation of wealth
• Encourages inequality in a
society
• Business lobbying with
government
• Monopolistic
tendency
• Human resource
exploitation
• Results in great disparities
between income of people
owning the capital resources
and others
Socialism
 Collective ownership and democratic control of the material means
of production by the workers and the people

•Socialism is a term applied to an economic system in which property is held

in common and not individually, and relationships are governed by a political
hierarchy. Common ownership doesn't mean decisions are made collectively,
however. Instead, individuals in positions of authority make decisions in the
name of the collective group.

•Socialists argue that socialism would allow for wealth to be distributed

based on how much one contributes to society, as opposed to how much
capital one holds.

•A primary goal of socialism is social equality and a distribution of Wealth

based on one’s contribution to society and an economic arrangement that
would serve the interests of society as a whole.
• Socialism as we know it today, most commonly refers to "market socialism,"
which involves individual market exchanges organized by collective planning.

• Difference between socialism and communism is that communists directly

oppose the concept of capitalism, an economic system in which production is
controlled by private interests. Socialists, on the other hand, believe
socialism can exist within a capitalist society.
• Features of Socialism;
• Social Ownership of means of production
• Existance of public sector
• Decisive role of Economic Planning
• Production guided by Social Benefits
• Abolition of exploitation of labour
• Benefits of Socialism
i. Better salaries
ii. Stable Environment
iii. Eliminates poverty
iv. Better Products
v. Fulfills survival need
vi. Opportunity for citizens to explore non-economically-
productive pursuits
• Criticism of Socialism
• Distorted price signals
• Suppression of economic democracy
• Slow Technological advancements
• Minimize self management
• Reduced incentives
COMPARISON
COMPARISON..
BASIS OF DIFFERENCE CAPITALIST ECONOMY SOCIALIST ECONOMY
Resources Ownership Privately owned State owned

Foundation belief competition brings out the best in cooperation is the best way
people for people to coexist

Earning of wealth everyone works for his own wealth everyone works for wealth
which is distributed equally to
everyone

Market Scenario Level playing field Protection to PSUs, Private

enterprises are permitted in
few businesses only

Govt. interference Only in situations where laws have Fully involved

been broken

Employees motivation Highly motivated on account of Rarely motivated as

proportional benefits performance is not rewarded

Merit Perception of better economic Equal distribution of income

growth because of competition results in welfare of all

Demerit Few individuals/groups attain Hard work is not rewarded,

powers, rest are exploited lazy employees also enjoy
equal level of benefits
 Mixed Economy
• Any economy in which private corporate enterprises and
public sector enterprises exist side-by-side, and decisions
taken through market mechanism are supplemented by some
form of partial planning, is to be described as a mixed
economy.

• This system overcomes the disadvantages of

both the market and planned economic systems.
• Provides a clear demarcation of the boundaries of public
sector and private sector so that the core sector and strategic
sectors are invariably in the public sector.

• The government intervenes to prevent undue concentration

of economic power, and monopolistic and restrictive trade
practices

• The rights of the individual are respected and protected

subject only to the requirements of public law and order
and morality
• Features
• Resources are owned both by the government as well
as private individuals. i.e. co-existence of both public
sector and private sector.

• Market forces prevail but are closely monitored by the

government.

• Monopolies may be existing but under close

supervision of the government.
• Advantages
• Producers and consumer have sovereignty to choose what to
produce and what to consume but production and consumption
of harmful goods and services may be stopped by the
government.

• As compared to Market economy, a mixed economy may have

less income inequality due to the role played by the government.

• A mixed economy represents an achievable balance between

individual initiative and social goals.
Prosperity: From the point of view of business, the prosperity phase of
business cycle is ideal. In this phase the economy expands in response to
growing aggregate demand and business firms have many options.
 New Products are introduced in this period and markets are created for
these products.
 Rising income=Allows customer to increase their consumption=whichever
firm can take advantage of this situation by taking appropriate policy
decisions will register rapid growth.
 Positive sentiments=Affects the capital market.
Recession: Forces of contraction get strengthened during recession. The
recession usually gets reflected in the form of stock market crash and some
fall in prices. The aggregate demand gradually declines and thus incentive
for investment is killed.
 The demand for consumer durables goods falls because people try to stick
to their consumption which they had achieved in the expansion phase.
 Multinationals like HUL, Colgate Palmolive, Nestle, ITC produce a variety
of consumer goods for which there is substantial demand in India.
Depression: Following recent recessions some economies have moved into a period
of sustained recovery.
 In cases when recessions persisted over a long period, economies got pushed into
depression. Depression is characterised by low economic activity, a notable fall in
production and employment, decline in general price level, deterioration in business
prospects and continuous erosion in the profits of producers and traders.
 During this period, there is an atmosphere of pessimism.
 These are the conditions in whih firms suffer heavy losses and finding uncertain
situation.
 No investment=Affects employment opportunity.
 However sooner or later, there is recovery in aggregate demand and with it
depression comes to an end.
Stagflation: Stagflation is a relatively new phenomenon. It is characteristiced by
inadequate growth, inflation and unemployment.
 It results from wrong fiscal policies of the government.
 When some government attempts to achieve a high rate of economic growth by
resorting to inflationary policy, the results may be encouraging in the shorter period
but in the long period such an economy plunges into stagflation.
 It is recommended that the government should attempt to correct
structural rigidities and imbalances in the economy to control
stagflation.